MORTGAGES; FEDERAL PREEMPTION; PARITY ACT: The Alternative Mortgage
Instrument Parity Act is not a complete preemption of state regulation; rather,
state consumer protection laws will apply except in those areas as to which
directly inconsistent federal regulations apply.

Borrowers entered into a "reverse annuity loan" arrangement with
an apparently related set of institutions.This device is designed to permit older people to benefit from the
appreciated value of their homes without having to either sell them or make
payments on a mortgage.Lender makes a
loan that will not require any repayment until the borrower either dies or
ceases living in the home.At that
time, the lender will receive the principal back, plus interest.

In this case, on a loan of $305,000, borrowers paid about $17,000 in fees.

Lender got a future interest equal to 70% of the current value of the home,
plus a right to any appreciation in value.The home was worth $1,060,000.This interest would accrue to the lender even if the borrowers died or
ceased to live in the home only a week or so after the transaction closed.

Borrowers then used a substantial amount of the loan proceeds to acquire an
annuity from a company apparently related to the lender.Under the terms of the annuity, borrowers
forfeited most of it if they failed to make a second payment.They did so fail, and wound up trading away
over $700,000 value in their home for a sum of about $125,000 and an annuity of
$719.58 per month.Clearly the court
was offended by the terms of this loan, and was sympathetic to the allegations
of borrower's counsel that lender had misled borrowers and failed to disclose vital
information, all in violation of state law.

Lender responded that state law had no impact here, as the loan transaction
was an "alternative mortgage" and insulated from state regulation by
federal law.

This case considers particular language of the Alternative Mortgage
Instrument Parity Act, part of the GarnSt. Germaine Act of 1982, an omnibus
banking statute that also contained the federal preemption of state regulation
of due on sale clauses.

The Parity Act was intended to follow the lead of the due on sale clause
preemption and provide a comfortable environment for the then developing breed
of alternative mortgage instruments.The concept "alternative mortgage instrument" was defined to
include virtually any home loan that was not a fixed rate, level debt service,
long term loan.

The benefits of the Act passed to a wide range of institutional lenders
virtually anyone subject to Truth in Lending. Specifically, any lender within
this group that wasnot directly
controlled by a federal agency (either the Bank Boardnow the Office of Thrift Supervision, the Comptroller of the
Currency, or the NCUA), could lend under the authorization of the regulations
adopted by the federal regulator that regulated its class of lenders.

The idea was to remove any competitive advantage to federally chartered
entities, who were protected from federal regulation, as had been underscored
by the De La Cuesta decision from the U.S. Supreme Court in 1978 (involving due
on sale clauses).As a result of De la
Cuesta, and in response to the extremely high interest rates prevailing at that
time, many institutions had converted from state chartered to federally
chartered institutions simply to take advantage of the federal regulatory
preemption of due on sale clauses.GarnSt. Germaine removed that advantage by preempting due on sale
clauses completely, and the Parity Act was intended to provide similar
protection to alternative mortgage instruments.It was thought that the federal agencies would be able to provide
an environment that would provide market experimentation and national programs,
so that the various new lending concepts could develop and prosper.

Interestingly, there has been precious little case law concerning the Parity
Act over the years.Only in the past
few years have we seen cases being brought on the issue of whether the Parity
Act protects nonfederal lenders from state regulation of prepayment
premiums.The decided cases tend to
favor preemption.The two most widely
circulated cases are National Home Equity Mortg. Ass'n v. Face, 239 F.3d 633 (4th
Cir.2001); andShinn v. Encore Mortg.
Services, 96 F.Supp.2d 419 (D.N.J.2000), which constituted the DIRT DD for
March 15, 2001.

The Face decision suggested that the meaning of the Parity Act was that
lenders who complied with the federal regulations in this area were free to act
without regard to any other state regulation. The notion was that the statute
intended "across the board" preemption of state regulation.

The argument for such an interpretation is that the various federal
regulatory agencies might well have intended to say nothing about a particular
area of conduct precisely because they did not want to have it regulated at
all.If non federal agencies were to
enjoy "parity" with their federal counterparts, they deserved the
same protection.

The plaintiffs in the instant case, Black, however, argued that the Parity
Act supported preemption only as to those areas that the federal regulatory
agencies specifically and expressly elected to regulate or insulate from
regulation.Although such an interpretation
is inconsistent with the notion of establishing parity treatment, it is
supported by the general concept that federal preemption should be read
narrowly wherever possible.

The court analyzed the critical language of the Parity Act as follows:

"In order to prevent discrimination against Statechartered depository
institutions, and other nonfederally chartered housing creditors, with respect
to making ... alternative mortgage transactions, housing creditors may make ...
alternative mortgage transactions, except that this section shall apply(1) with
respect to banks, only to [transactions made in accordance with certain
regulations issued by the Comptroller of the Currency]; [P] (2) with respect to
credit unions, only to [transactions made in accordance with other regulations
issued by the National Credit Union Administration Board]; [P] (3) with respect
to all other housing creditors ... only to transactions made in accordance with
regulations governing alternative mortgage transactions as issued by the
Director of the Office of Thrift Supervision for federally chartered savings
and loan associations, to the extent that such regulations are authorized by
rulemaking authority granted to the Director of the Office of Thrift
Supervision with regard to federally chartered savings and loan associations
under laws other than this section."

On the subject of preemption, the Parity Act provides:

"[A]n alternative mortgage transaction may be made by a housing
creditor in accordance with this section, notwithstanding any State
constitution, law, or regulation."

The court also pointed out that the federal statute contained a note
directing the various regulatory agencies to "identify, describe, and
publish those portions or provisions of their respective regulations that are
inappropriate for (and thus inapplicable to), or that need to be conformed for
the use of, the nonfederally chartered housing creditors to which their
respective regulations apply...."The Office of Thrift Supervision (the relevant regulator in this case)
adopted such as statement, and identified as critical preemptive regulations
its rules on late charges, prepayments, loan adjustments, and disclosure of
loan adjustments.All other federal
regulations were "deemed inappropriate and inapplicable."

From this statement, the court drew the inference that only those identified
areas of regulation were critical concerns of the federal lender, and that
states were free to regulate in other areas.The charged offenses of state laws in this case did not involve the
preempted areas, and consequently were subject to state law.The court rejected the argument of the
lender that the purpose of the statute was to permit nonfederal housing
creditors to be as free of state regulation as federal housing creditors
were.The lender argued that if a
lender complied with the identified federal regulations, it was making an
"alternative mortgage transaction" in accordance with the federal
law, could be made "notwithstanding any State constitution, law, or regulation,"
just like the statute says.

The court noted that in general preemption is authorized in the interest of
promoting a nationally uniform program.But here, since the federal regulations are so limited in reach, the
nonfederal lenders would enjoy an "anything goes" environmenthardly conducive to uniformity.The court backed up its argument by citing a
recent regulatory pronouncement of the Office of Thrift Supervision that
claimed that the Parity Act did not preempt all state regulation.

Comment 1: Candidly, the Alternative Mortgage Instrument Parity Act has
outlived its usefulness, and the Congress should consider a different balance
between state and federal regulatory authority.It was designed to create a nurturing cradle for newly developed
lending devices.But these devices, 20
years later, are now robust and active, and in some casesneed moreto be corralled than nurtured.

Nevertheless, it was the editor's view, at the time the Act was enacted,
that it was a complete preemption of state regulation of alternative mortgage
lending practices.There were no
comprehensive existing federal regulations, and there was certainly the notion
in existence that the economy needed to have the "market find its own
level."

Comment 2: The editor, of course, would prefer that the Congress, and not
the California Court of Appeals, determine what the appropriate next regulatory
step will be.But this little
disagreement may be moot.If lenders
have assumed that they are exempt from local laws, and now suddenly find their
national programs subject to the welter of contradictory and inconsistent state
regulations, they'll take their problem to the Congress and we'll get a
different approach.

MORTGAGES; FEDERAL PREEMPTION; PARITY ACT: The Alternative Mortgage
Instrument Parity Act is not a complete preemption of state regulation; rather,
state consumer protection laws will apply except in those areas as to which
directly inconsistent federal regulations apply.

Borrowers entered into a "reverse annuity loan" arrangement with
an apparently related set of institutions.This device is designed to permit older people to benefit from the
appreciated value of their homes without having to either sell them or make
payments on a mortgage.Lender makes a
loan that will not require any repayment until the borrower either dies or
ceases living in the home.At that
time, the lender will receive the principal back, plus interest.

In this case, on a loan of $305,000, borrowers paid about $17,000 in fees.

Lender got a future interest equal to 70% of the current value of the home,
plus a right to any appreciation in value.The home was worth $1,060,000.This interest would accrue to the lender even if the borrowers died or ceased
to live in the home only a week or so after the transaction closed.

Borrowers then used a substantial amount of the loan proceeds to acquire an
annuity from a company apparently related to the lender.Under the terms of the annuity, borrowers
forfeited most of it if they failed to make a second payment.They did so fail, and wound up trading away
over $700,000 value in their home for a sum of about $125,000 and an annuity of
$719.58 per month.Clearly the court
was offended by the terms of this loan, and was sympathetic to the allegations
of borrower's counsel that lender had misled borrowers and failed to disclose
vital information, all in violation of state law.

Lender responded that state law had no impact here, as the loan transaction
was an "alternative mortgage" and insulated from state regulation by
federal law.

This case considers particular language of the Alternative Mortgage
Instrument Parity Act, part of the GarnSt. Germaine Act of 1982, an omnibus
banking statute that also contained the federal preemption of state regulation
of due on sale clauses.

The Parity Act was intended to follow the lead of the due on sale clause
preemption and provide a comfortable environment for the then developing breed
of alternative mortgage instruments. The concept "alternative mortgage instrument" was
defined to include virtually any home loan that was not a fixed rate, level
debt service, long term loan.

The benefits of the Act passed to a wide range of institutional lenders
virtually anyone subject to Truth in Lending. Specifically, any lender within
this group that wasnot directly
controlled by a federal agency (either the Bank Boardnow the Office of Thrift Supervision, the Comptroller of the
Currency, or the NCUA), could lend under the authorization of the regulations
adopted by the federal regulator that regulated its class of lenders.

The idea was to remove any competitive advantage to federally chartered
entities, who were protected from federal regulation, as had been underscored
by the De La Cuesta decision from the U.S. Supreme Court in 1978 (involving due
on sale clauses).As a result of De la
Cuesta, and in response to the extremely high interest rates prevailing at that
time, many institutions had converted from state chartered to federally
chartered institutions simply to take advantage of the federal regulatory
preemption of due on sale clauses.GarnSt. Germaine removed that advantage by preempting due on sale
clauses completely, and the Parity Act was intended to provide similar protection
to alternative mortgage instruments.It
was thought that the federal agencies would be able to provide an environment
that would provide market experimentation and national programs, so that the
various new lending concepts could develop and prosper.

Interestingly, there has been precious little case law concerning the Parity
Act over the years.Only in the past
few years have we seen cases being brought on the issue of whether the Parity
Act protects nonfederal lenders from state regulation of prepayment
premiums.The decided cases tend to
favor preemption.The two most widely
circulated cases are National Home Equity Mortg. Ass'n v. Face, 239 F.3d 633
(4th Cir.2001); andShinn v. Encore
Mortg. Services, 96 F.Supp.2d 419 (D.N.J.2000), which constituted the DIRT DD
for March 15, 2001.

The Face decision suggested that the meaning of the Parity Act was that
lenders who complied with the federal regulations in this area were free to act
without regard to any other state regulation. The notion was that the statute
intended "across the board" preemption of state regulation.

The argument for such an interpretation is that the various federal
regulatory agencies might well have intended to say nothing about a particular
area of conduct precisely because they did not want to have it regulated at
all.If non federal agencies were to
enjoy "parity" with their federal counterparts, they deserved the
same protection.

The plaintiffs in the instant case, Black, however, argued that the Parity
Act supported preemption only as to those areas that the federal regulatory
agencies specifically and expressly elected to regulate or insulate from
regulation.Although such an
interpretation is inconsistent with the notion of establishing parity
treatment, it is supported by the general concept that federal preemption
should be read narrowly wherever possible.

The court analyzed the critical language of the Parity Act as follows:

"In order to prevent discrimination against Statechartered depository
institutions, and other nonfederally chartered housing creditors, with respect
to making ... alternative mortgage transactions, housing creditors may make ...
alternative mortgage transactions, except that this section shall apply(1) with
respect to banks, only to [transactions made in accordance with certain
regulations issued by the Comptroller of the Currency]; [P] (2) with respect to
credit unions, only to [transactions made in accordance with other regulations
issued by the National Credit Union Administration Board]; [P] (3) with respect
to all other housing creditors ... only to transactions made in accordance with
regulations governing alternative mortgage transactions as issued by the
Director of the Office of Thrift Supervision for federally chartered savings
and loan associations, to the extent that such regulations are authorized by
rulemaking authority granted to the Director of the Office of Thrift
Supervision with regard to federally chartered savings and loan associations
under laws other than this section."

On the subject of preemption, the Parity Act provides:

"[A]n alternative mortgage transaction may be made by a housing
creditor in accordance with this section, notwithstanding any State
constitution, law, or regulation."

The court also pointed out that the federal statute contained a note
directing the various regulatory agencies to "identify, describe, and
publish those portions or provisions of their respective regulations that are
inappropriate for (and thus inapplicable to), or that need to be conformed for
the use of, the nonfederally chartered housing creditors to which their
respective regulations apply...."The Office of Thrift Supervision (the relevant regulator in this case)
adopted such as statement, and identified as critical preemptive regulations
its rules on late charges, prepayments, loan adjustments, and disclosure of
loan adjustments.All other federal
regulations were "deemed inappropriate and inapplicable."

From this statement, the court drew the inference that only those identified
areas of regulation were critical concerns of the federal lender, and that
states were free to regulate in other areas.The charged offenses of state laws in this case did not involve the
preempted areas, and consequently were subject to state law.The court rejected the argument of the
lender that the purpose of the statute was to permit nonfederal housing
creditors to be as free of state regulation as federal housing creditors were.The lender argued that if a lender complied
with the identified federal regulations, it was making an "alternative
mortgage transaction" in accordance with the federal law, could be made
"notwithstanding any State constitution, law, or regulation," just
like the statute says.

The court noted that in general preemption is authorized in the interest of
promoting a nationally uniform program.But here, since the federal regulations are so limited in reach, the
nonfederal lenders would enjoy an "anything goes" environmenthardly conducive to uniformity.The court backed up its argument by citing a
recent regulatory pronouncement of the Office of Thrift Supervision that
claimed that the Parity Act did not preempt all state regulation.

Comment 1: Candidly, the Alternative Mortgage Instrument Parity Act has
outlived its usefulness, and the Congress should consider a different balance
between state and federal regulatory authority.It was designed to create a nurturing cradle for newly developed
lending devices.But these devices, 20
years later, are now robust and active, and in some casesneed moreto be corralled than nurtured.

Nevertheless, it was the editor's view, at the time the Act was enacted,
that it was a complete preemption of state regulation of alternative mortgage
lending practices.There were no
comprehensive existing federal regulations, and there was certainly the notion
in existence that the economy needed to have the "market find its own
level."

Comment 2: The editor, of course, would prefer that the Congress, and not
the California Court of Appeals, determine what the appropriate next regulatory
step will be.But this little
disagreement may be moot.If lenders
have assumed that they are exempt from local laws, and now suddenly find their
national programs subject to the welter of contradictory and inconsistent state
regulations, they'll take their problem to the Congress and we'll get a
different approach.

Readers are urged to respond, comment, and
argue with the daily development or the editor's comments about it.

Items in the Daily Development section
generally are extracted from the Quarterly Report on Developments in Real
Estate Law, published by the ABA Section on Real Property, Probate & Trust
Law. Subscriptions to the Quarterly Report are available to Section members
only. The cost is nominal. For the last six years, these Reports have been
collated, updated, indexed and bound into an Annual Survey of Developments in
Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual
Survey volumes are available for sale to the public. For the Report or the
Survey, contact Maria Tabor at the ABA. (312) 988 5590 or
mtabor@staff.abanet.org

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